Thirst for larger iPhone 6 to benefit Hon Hai: CLSA

TAIPEI--The anticipated launch of larger iPhone models later this year should benefit Taiwan-based Hon Hai Precision Industry Co. (鴻海精密) because many smaller iPhones in circulation will likely be replaced, according to brokerage CLSA Ltd.

The new iPhone 6 models should see booming sales as 225 million iPhones will be up for replacement over the iPhone 6's life-cycle from September this year to August next year, said Nicolas Baratte, head of technology research at CLSA.

Of those 225 million older iPhones, 131 million are 3.5-inch models like the iPhone 4S, the brokerage said.

“We concur that the launch of larger iPhones (4.7” and 5.5”) should trigger a larger replacement cycle as we believe that many smartphone users favor a larger display size of 4.5” and more,” Baratte wrote in an April 13 note to clients.

The high volume of iPhone 6 shipments should increase Hon Hai's operating margin to 3.1 percent in 2014 from 2.8 percent in 2013, and company is also expected to more tightly control its working capital and improve its cash flow, he said.

On the back of better financials and the upcoming iPhone 6 product cycle, Baratte upgraded his rating on Hon Hai shares from “underperform” to “outperform,” with a price target of NT$96.5 (US$3.19).

As of Tuesday, shares in Hon Hai rose 0.69 percent to NT$87.2 in Taipei.

Hon Hai, the main assembler of Apple's devices and the world's largest contract manufacturer of electronic goods, posted a more than 18 percent month-on-month increase in consolidated sales in March.